Executive Summary

One of the not-so-secret “secrets” of financial planning is that relatively few advisors actually generate the bulk of their income by getting paid for financial planning advice. Instead, despite the growth of financial planning in recent decades, the reality is still that most advisors get paid for financial planning through the subsequent products that are sold for implementation, or the subsequent assets they gather or retain through financial planning as a value-add.

In fact, with its focus on investment accumulation (for retirement and college) and insurance-related scenarios, most financial planning software may be little more than a product sales and asset gathering tool shrouded in financial planning terms. Areas that are highly relevant for financial advice but not for product sales – from tax strategies to debt management to cash flow and budgeting – remain remarkably absent from most financial planning software tools available today.

Given that financial planning is a complex, intangible service that may be beneficial for clients but is hard for them to conceptualize, having tools to illustrate financial planning strategies, help clients adjust their behavior, and show the value of the advice we’ve delivered is essential. Yet in a world where most financial planning software remains so product-centric, have we progressed to the point where the financial planning software is not facilitating real advice, but limiting its growth?

The Product-Centric Roots Of Financial Planning

The reality of financial planning is that it was birthed from a world of selling insurance and investment products (and at the time, tax shelters as well). And since the core topic areas for the CFP marks are based on a job task analysis of what financial planners do – which in turn is based on what financial planners sell in order to get paid – it is perhaps not entirely surprising that the core topic areas of financial planning education are still based around the financial services products for which financial services professionals get paid.

After all, doing insurance and estate planning was quite effective at delivering insurance sales. Early on, most insurance agents were trained in helping people with their cash flow and budgeting as well, but only to the extent necessary to help them figure out how to “free up” monthly cash flow to pay for insurance premiums!

Similarly, college and retirement planning was/is popular because it supports the accumulation of investment portfolios, and the management of investment assets. And tax planning was an early pillar of financial planning because of the popularity of tax shelters in the 1970s and early 1980s – another way to gather assets at the time – and remains popular because of the tax planning benefits associated with various insurance and accumulation products (from tax-deferred annuities to tax-preferenced life insurance, to accumulating investments in 529 college savings plans and employer retirement plans).

Even many of today’s educational programs that teach “Communication” for advisors are most about sales and marketing skills to get paid for bringing in clients and delivering financial services products to them, rather than counseling and advice.

Given these roots of financial planning as being product-centric, it is also perhaps not entirely surprising that the focus of financial planning software is ultimately on showing the impact – the benefits – of the financial products that most advisors sell.

After all, retirement projections illustrate the ‘virtues’ of accumulating large portfolios (for advisors to manage), and provide targets for clients to save towards those portfolio accounts (which the advisor will be paid to manage). Insurance capital needs projections are built to show under-insurance shortfalls, to demonstrate that clients need to buy more insurance product coverage. Even “goals-based planning” strategies are ultimately all about how a particular financial services product or service (an annuity, a managed portfolio, a 529 plan, etc.) will fit into achieving the goal.

Of course, as financial services products and strategies wax and wane, so too does the particular focal areas of financial planning software. With the rise of the AUM model and baby boomer retirees, planning software has become more retirement-centric to illustrate the benefits of the advisor managing the retirement portfolio. As the number of people exposed to estate taxes has declined dramatically in the past 15 years, so too has the depth of estate planning modules in financial planning software been on the wane.

The reason why this product-centric focus of financial planning software is so significant, is that while the software does a reasonable job of illustrating the tactics and products for which advisors are paid, it does a remarkably poor job of illustrating the impact of any advice that isn’t specifically product-centric. Which ultimately is very limiting for the ability of advisors to deliver – and show the value of – true comprehensive financial planning advice!

Similarly, while debt is a significant financial reality for most households, from relatively ‘stable’ and low-cost debt like mortgages and auto loans, to higher-cost debts like student loans and credit cards (or the increasingly popular peer-to-peer loan), and has a material impact on a household’s cash flows and career decisions, financial planning software has virtually no capabilities to effectively model debt and debt management strategies. Yet again, perhaps this is not surprising, given that financial advisors typically are not paid for “selling” mortgage products or debt consolidation strategies… even though effective use of those tools is essential for the financial health of most households!

At the other end of the spectrum, for those at higher net worth levels, often the biggest opportunity to generate cash flow savings is not from spending and debt management, but from tax strategies, whether simply maximizing available deductions, to tactically managing tax brackets from year to year with capital gains or loss harvesting and partial Roth conversions, to more proactive estate planning strategies like rolling GRATs and shifting asset appreciation outside the estate through a sale to an IDGT. Or even in the context of retirement, illustrating not just how diversified retirement assets will growth, but how to liquidate them systematically over time in a tax-sensitive manner (which accounts should you liquidate first, and when, and in what order!)! Yet in this case as well, because creating value for clients with tax-savvy strategies would involve getting paid for the (tax-related) advice itself, and not a financial services product, financial planning software has lagged in creating solutions to illustrate these strategies.

In fact, the notable trend amongst all of these categories is that, because they don’t relate directly to the sale of a financial product, they are often relegated to relatively simple assumptions – taxes are just assumed to be a general average effective rate or calculated in an over-simplified manner, spending is just measured based on gross spending with little detail of categories, and debt is just shown as a liability on the balance sheet and perhaps a committed spending obligation but with no tools to illustrate strategies to pay it down.

Yet the real problem is that in these areas of complexity and challenging behavior change, without tools to illustrate strategies and their benefits and outcomes, it’s incredibly difficult to get clients to engage! Especially when the reality is that behavior rarely changes at once, and that ultimately financial planning is an ongoing process, not simply a one-time event!

A Call To Financial Planning Software Providers To Support Real Financial Planning Advice

So what has to change for financial planning software to become more effective at actually illustrating and supporting the value of broader, real comprehensive financial planning advice?

First and foremost, it’s time to end the increasingly meaningless distinction between “goals-based” and “cash-flow-based” financial planning software. The whole point of planning is to tie every cash flow to a goal, and a goal can’t be effectively evaluated without considering all of the relevant cash flows. In fact, just making a distinction between the two highlights the failure of integrating an accurate projection of cash flows to the goals they related to (whether it’s goals-based software that glosses too lightly over cash flows, or cash-flow-based software that gets so mired in the trees that advisors and clients can no longer see the forest!)!

Second, it’s time to get real about working with clients on spending (at least, those who are ready and willing to go there). Financial planning software needs to have capabilities for account aggregation not only for assets and account balances, but for cash flows from bank accounts and debit/credit cards. Few clients out there will ever take the time to manually account for their monthly cash flows, but the reality is that in today’s increasingly cashless society where almost all spending is digital, there’s no need to agonize over spending tracking. Technology can automate most of that process (and gets better every year). But financial planning software needs to gather that data, pull it into the software, and help us as advisors produce relevant insights and guidance for clients.

Third, it’s also time to get real about taxes. They are an enormous financial reality for clients, material to the long-term financial health and success of a plan, and grossly oversimplified in most financial planning software today. At a minimum, financial planning software should be able to take projected cash flows – particularly once spending is captured at a more granular level, as noted above – and be able to project a pro-forma tax return each year into the future, so that the true impact of taxes can be shown across the plan. But ultimately, it’s about more than just illustrating how a plan will play out in the future given the real impact of taxes. It’s about having tools to then illustrate the ways that planning strategies can alter those outcomes. If I project a client does a partial Roth conversion of $50,000/year throughout their 60s to mitigate the impact of taxes in their 70s, the planning software should show the benefit. If I’m going to recommend the client liquidate portfolios in a tax-savvy manner by harvesting gains in low-income years and losses in high-income years, planning software should show that benefit too. Planning software should be able to easily show year by year when tax rates will be high enough it’s best to contribute to a traditional IRA, and when rates are low enough that a Roth would be preferable.

Fourth, financial planning software needs to help us actually create a plan with clients, which means not only being flexible enough to show alternative scenarios on the spot, but also the ability to modify the plan in response to show how the client will get back on track. Don’t make planning software the equivalent of a flight simulator where all you can do is see the plane crash but have no means to practice steering out of the crash. The software tools should be capable of showing a baseline scenario, potential adverse events, and the successful strategies to respond to them. And of course, it wouldn’t hurt to be able to illustrate how clients will respond to unexpected positive events like a strong bull market, either!

Fifth, financial planning software makers need to embrace the reality that financial planning is a process, not an event. The entire idea of culminating in a single financial plan and then stamping it done is the equivalent of a general drafting a battle plan and then walking away from the battle, “secure” in the knowledge that the troops have a battle plan that tells them what to do… and ignoring the reality that the general needs to be there to help continuously guide and adapt the plan as reality unfolds. In practice, what this means is that financial planning software needs to update itself continuously (through account aggregation), and provide more meaningful ways for clients to track progress towards goals on a continual basis, and see the points at which they’ll have to adjust along the way, so they always know where they stand.

Sixth and final, while it’s true that detailed financial planning software of the past was clunky and cumbersome – and one of the virtues of early goals-based software was that it became simpler to use – ultimately the goal of financial planning software should be improving ease of use without throwing out the complex reality of our clients’ lives (and the planning opportunities that lie within). While making software easier to use is crucial – and there’s nothing wrong with starting out using simple default assumptions – not having the ability to drill down further, and sacrificing precision and compromising accuracy, should no longer be acceptable.

In the past, the reality is that financial planning software was little more than a behind-the-scenes calculator that “financial advisors” used to calculate and illustrate the impact their products would have in the client’s financial future. And while that process was fine for selling products – and meant that financial planning software only had to illustrate financial issues relevant to the associated products – if financial planning is to evolve into a full-fledged profession that goes beyond just products, so too much the financial planning software we use.

Ironically, then, one of the greatest challenges that comprehensive financial planners face today is that there are few financial planning software tools to actually illustrate non-product-centric financial planning strategies. The shortcomings of our financial planning software are becoming inhibitors to our growth as a profession. It’s time for a change.

So what do you think? Are you happy with the current state of financial planning software? Where do you think the gaps are? What do you wish financial planning software did different/better than it does today?